After banks began to drop certain customers because of perceived regulatory concerns, on July 28, 2014, the U.S. Federal Deposit Insurance Corporation (FDIC) issued additional guidance on its supervisory approach to banks maintaining accounts for third party payment processors, which are companies that process payments for merchants.
Previous guidance issued by the FDIC had discussed the various risks that can be associated with maintaining these accounts and included examples of certain types of merchants that had been associated with higher risk activity, such as merchants engaged in activity that might be prohibited for certain consumers such as minors. The FDIC noted in 2008 that, “Payment processors pose greater money laundering and fraud risk if [banks] do not have an effective means of verifying their merchant clients’ identities and business practices.” In 2011 guidance, the FDIC advised banks that these types of relationships needed proper account management, adding that “[f]inancial institutions need to assure themselves that they are not facilitating fraudulent or other illegal activity. Institutions could be exposed to financial or legal risk should the legality of activities be challenged.”
Unfortunately, some banks perceived the guidance as the FDIC discouraging banks from maintaining accounts for third party payment processors that serviced those high-risk businesses, and as a result, closed the accounts, leaving those companies scrambling to establish new banking relationships.
In the new guidance, the FDIC makes it clear that the types of businesses mentioned in the previous guidance were only meant to be examples of businesses that may require heightened scrutiny for which appropriate risk management procedures should be in place. The FDIC specifically states that it does not prohibit or discourage banks from maintaining accounts for any customer “operating in compliance with applicable law.” Access the July 28 FDIC guidance, which includes links to previously issued guidance.
Money Transmitters Also Have Had Problems Maintaining Banking Relationships
This is not the first time that banks have closed accounts based upon a misperception that regulators discourage banks from maintaining accounts for certain types of businesses. Several years ago, banks began closing accounts maintained for money transmitters, based on concerns that they would be required to oversee compliance by the money transmitters with their own anti-money laundering (AML) regulatory requirements. In March 2005, the U.S. federal banking agencies issued a joint statement noting that money services businesses, such as money transmitters, provide valuable services to consumers and are responsible for their own AML regulatory requirements The agencies assured banks that they are not required to be the de facto regulator of its money services business customers, yet added that banks that do provide banking services to money services businesses need to apply the requirements of the AML laws on a “risk-assessed basis, as they do for all customers, taking into account the products and services offered and the individual circumstances.” View the statement. Despite that statement and additional guidance issued in April of 2005, many banks still closed accounts of their money transmitter customers and have not resumed servicing these businesses.
Banking Legal Marijuana Retailers Remains Difficult
Finally, as individual states legalize the sale of marijuana, banks have been reluctant to establish bank accounts for these businesses because marijuana still remains an illegal substance under federal drug laws. In February 2014, the Financial Crimes Enforcement Network (FinCEN), the U.S. AML agency, issued guidance on how banks could provide banking services to marijuana businesses in states that had legalized the sale of marijuana. Access the FinCEN guidance. While banks may still be a bit wary of establishing bank accounts because of what they consider to be continued legal uncertainty about the issue, FinCEN director Jennifer Shasky Calvery in a recent speech noted that currently there are 105 individual financial institutions providing banking services to marijuana-related businesses. Read her speech.